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 You are in: Under Secretary for Public Diplomacy and Public Affairs > Bureau of Public Affairs > Bureau of Public Affairs: Office of the Historian > Foreign Relations of the United States > Nixon-Ford Administrations > Volume III
Foreign Relations, 1969-1976, Volume III, Foreign Economic Policy, 1969-1972; International Monetary Policy, 1969-1972
Released by the Office of the Historian
Documents 130-144

130. Memorandum From Secretary of the Treasury Kennedy to President Nixon/1/

Washington, June 23, 1969.

/1/ Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential. Another copy is attached to Document 131.

I am transmitting herewith a memorandum (Annex I) prepared by an interagency group under the chairmanship of Under Secretary Volcker, setting forth your basic options in international monetary affairs./2/ The complexity of the issue will require some extended discussion. It may be useful to highlight a few points on which early guidance will be particularly useful.

/2/The 48-page, double-spaced Annex I, entitled "Basic Options in International Monetary Affairs" and dated June 23, is not printed. An earlier, 33-page version was circulated to members of the Volcker Group as VG/LIM/69-66 on June 19 for discussion in a meeting of the Group on June 21. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/62-VG/LIN/70) On June 20 Bergsten provided Willis with written "Comments on Draft Options Paper." (Ibid., Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Basic Options 3-6/69-Confidential; LIMDIS) A revised version was circulated as VG/LIM/69-68 on June 22 for discussion by the Group on June 23. (Ibid., Volcker Group Masters: FRC 56 86 30, VG/LIM/62-VG/LIM/70)

The document suggests three major alternatives, which are discussed in paragraphs 25 to 50, and summarized in Attachment A.

The principal question for decision arising here is whether we should conclusively rule out any option at this stage.

Assuming that for the present Option I (a series of multilateral negotiations pointing toward a fundamental, but evolutionary change in the existing system) is to be pursued, these negotiating issues either will or may be faced in days or weeks:

(a) The SDR question: negotiations are beginning on June 27, and we should reach a decision on the amounts that we should propose to be activated for the first five-year period.

(b) The question of adjustment of exchange rates may be precipitated at any time by a French move; we need guidance on the extent to which we might bring political pressure on one party or another to achieve the desired result.

(c) A speculative crisis may at any time require additional credit support for the pound, to prevent a further depreciation; Europeans are very reluctant to go further, and additional extension of Federal Reserve short-term credit may ultimately require Congressional funding. What is our attitude?

What should our public posture be on proposals for limited exchange rate flexibility and how is it to be timed and handled?

These issues are discussed in paragraphs 51 to 65 of the attached memorandum.

Also, paragraphs 62 to 65 allude to the fact that payments of gold to the IMF in 1969-71, partly in connection with quota increases, and "nibbling" gold sales to central banks could possibly reduce our gold reserves as low as $8 billion. It is important for negotiating purposes to know whether this prospect is acceptable.

While I hope you will be able to read the memorandum to get the full flavor, I thought it would be useful if we started the meeting on Thursday/3/ by having Under Secretary Volcker review the main points orally, with the assistance of some charts, before proceeding with the general discussion.

/3/June 26.

I know you are aware of the sensitivity of some of the material included here, and we have safeguarded copies accordingly./4/ Subject to your approval, I believe that the attendance should be kept very limited. The following are now expected to attend:

/4/On June 23 Under Secretary Volcker sent a memorandum to the six principals listed below to the effect that Secretary Kennedy wanted the existence and contents of the Basic Options paper limited to the recipients, and that all earlier drafts should be destroyed or returned to his office. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers) 

The Secretary of State
Federal Reserve Chairman Martin
Dr. Arthur Burns
Dr. Henry Kissinger
Dr. Paul McCracken
Budget Director Mayo
David M. Kennedy


Attachment A/5/ 

/5/Confidential; Limdis.


[Paragraph notations refer to the basic document (Annex I)]/6/

/6/Brackets in the source text. 

I. Paragraphs 30 to 32. A series of multilateral negotiations pointing toward a fundamental, but evolutionary, change in the existing system. This would include:

(a) Early activation of Special Drawing Rights in a substantial amount. The U.S. asking figure would be $4 to $4-1/2 billion, as against a possible European starting point of around $2 billion a year, for 5 years.

(b) Realignment of exchange rates, with emphasis on a substantial appreciation of the Deutschemark (and other strong currencies if possible). We would acquiesce in a moderate French depreciation, which may be inevitable and perhaps imminent.

(c) After SDR activation, an active and sympathetic exploration of various forms of limited exchange rate flexibility designed for the longer term.

(d) Negotiations to expand IMF quotas in 1970.

(e) At some stage, possible exploration of the feasibility and desirability of "reserve settlement account" proposals designed to consolidate dollar balances and gold in a common reserve pool.

(f) Continued and strong efforts to remove structural impediments to our trade and to achieve better offset arrangements on military expenditures.

This approach, if successful, should restore considerable flexibility for U.S. policies and preserve a united world monetary structure. The main disadvantage is that the cautious pace of multilateral agreement may fail to move rapidly enough to achieve the objective and relieve the present strain.

II. Paragraphs 33 to 39. Suspension of the present gold convertibility at the request of foreigners. This might be forced upon us by reserve losses, or considered necessary because of insufficient results under Option I. It could take various forms ranging from continuing some convertibility on a negotiated basis, using gold, IMF drawings or other assets, to an entirely passive role that would make all foreign dollar holdings inconvertible. If successful, this move to a "dollar standard" would reduce gold losses, stimulate favorable currency realignment, and retrieve flexibility in financing U.S. deficits and influencing the international monetary system. Disadvantages would be the possible acceleration of divisive tendencies leading towards a dollar bloc and a European gold bloc, a general European reaction against financial cooperation, the possibility of foreign controls to limit dollar receipts from U.S. investment, and undesirable special exchange arrangements.

III. Paragraphs 40 to 50. A small or large increase in the official gold price. This would require formal Congressional approval, against probable strong resistance from important Congressional quarters in both parties.

The purpose of a small change would be to facilitate limited exchange realignment, but this would be achieved only with serious international political problems and at the risk of a run on our gold stock in anticipation of further changes.

A massive increase would be designed to strengthen our reserve position and flood the world with liquidity, thus potentially "buying time" for financing future deficits. On the other hand, such a change would add to the current world-wide inflationary potential and present extremely serious problems of equity for Japan, Canada and other dollar-holding countries. Progress toward the more basic monetary reforms under Option I would be shelved indefinitely, and any added financing flexibility could be short-lived. For these reasons, this option had no support in the "Volcker Group."


131. Action Memorandum From the President's Assistant for National Security Affairs (Kissinger) to President Nixon/1/

Washington, June 25, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential.

Your Meeting on International Monetary Policy on June 26 at 10:30 a.m.

The following memorandum outlines the policy choices which you face in the international monetary area, summarizes the options for implementing them presented in the paper submitted by Secretary Kennedy (Tab A),/2/ provides a political assessment of the options, and makes recommendations. Comments by Paul McCracken are at Tab B./3/

/2/Document 130.

/3/No record of the June 26 meeting was found. During an August 25, 1997, interview with the editor, Bergsten characterized it as, in effect, the NSC meeting that had been contemplated in NSSM 7, which had been canceled (see footnote 2, Document 109 and Document 16). According to the President's Daily Diary, Kennedy, Rogers, Martin, Mayo, Burns, Kissinger, McCracken, Volcker, Samuels, and MacLaury attended the meeting, which was held in the Cabinet Room from 10:40 to 11:36 a.m. (National Archives, Nixon Presidential Materials, White House Central Files, President's Daily Diary)

U.S. Policy Issues 

The U.S. balance of payments is a problem because it can place constraints on both our domestic economic policy and our foreign policy. Our basic objective is to minimize those constraints. In addition, we seek a smoothly functioning international monetary system because it will promote world economic development and our basic foreign policy objectives. We have four broad alternatives, which in practice can of course be combined, for dealing with the problem:

1. We can try to finance our deficits. There are four ways to do so:

(a) Borrow explicitly, from the International Monetary Fund or elsewhere. This would subject us to increasing foreign influence over our domestic economic policy and would only postpone the problem since all explicit loans of large magnitude would have relatively short maturities.

(b) Borrow implicitly by inducing other countries to build their dollar holdings. At the extreme, this would mean getting (or forcing) the world to go onto a "dollar standard". The probable magnitude is much greater here and would carry no fixed maturities. However, the outstanding dollar balances would always represent a threat to our reserves. They could also be a source of instability for the overall system unless the "dollar standard" were formalized, which could cause serious political problems.

(c) Get large enough creation of Special Drawing Rights (SDRs). The scope here is decidedly smaller, since we are likely at best to get about $500 million of freely usable SDRs annually for the first five years of the scheme, compared with payments deficits which may run to several billion dollars.

(d) Sharply increase the price of gold. This would give us a windfall reserve increase of $10 billion if the price were doubled. Some or most of it might, however, have to be used to convert outstanding dollar balances, which now exceed $15 billion in official hands and another $20 billion in private foreign hands. Foreigners might be unwilling to add to their dollar holdings in the future--cutting off our main present avenue of financing. The net effects are thus not clear even in a financing sense. (I discuss this option in broader terms below.)

2. We can seek equilibrium in our balance of payments by deflating our domestic economy sufficiently. All the experts think this would require much more than the disinflation which is needed for purely domestic reasons. It is thus rejected outright in the paper. I agree with this conclusion and note also that a severe U.S. recession--which would probably be necessary--would be disastrous for foreign policy as well as domestic economic reasons since it would so drastically affect the living standards of so many other countries.

 3. We could continue to apply controls to some or all of our external transactions. The paper concludes that we will probably have to maintain some controls whatever path we follow. I am not sure that this is right. I am sure that reliance on controls would require us to extend them well beyond where they are now--to cover all capital movements, Government transactions, and probably trade itself. Such reliance would increase greatly the pressures to bring back troops from Europe and cut aid. It would increasingly poison our international relations as well as be contrary to our basic economic philosophy.

4. We could seek a change in the exchange rate of the dollar vis-a-vis at least some of the other major currencies. This is probably the only lasting way to really move toward equilibrium in our payments position. It could be done either by:

(a) A small increase in the U.S. price of gold without comparable increases by at least some other countries. (A change in the price of gold per se does not mean a change in the exchange rate between the dollar and other currencies if they maintain their present peg to the dollar and simply accept the higher gold price in terms of their currencies as well.) The Kennedy paper rightly points out that this course has so many economic disadvantages that it should be rejected.

(b) Upvaluations of their exchange rates by other countries, notably Germany. This is a necessary step under any satisfactory reform scheme and is probably a prerequisite for the next item. The problem is getting enough other countries to upvalue by enough.

(c) Adoption of a system of greater flexibility of exchange rates. (b) is a one-shot change while this would provide a fundamental reform aimed at maintaining the new equilibrium. It could either be negotiated multilaterally, adopted by some key countries unilaterally, or forced on the world by a unilateral U.S. action to suspend convertibility of the dollar.

Options in the Kennedy Paper

The paper presents three alternative policy courses for the United States:

1. A negotiated multilateral solution which would essentially include:

(a) Sufficient activation of SDRs. Large amounts are needed both to give us adequate financing and to help remove the present tightness in the overall system. The paper recommends that we ask for $4.5 billion annually but be prepared to accept a smaller amount, probably around $3 billion.

(b) A realignment of existing exchange rates, particularly upvaluation of the German mark. It is recognized that we will probably have to accept French devaluation to get the mark upvalued. The paper is not sanguine about getting additional upvaluations which would help the United States.

(c) Active and sympathetic exploration of greater flexibility of exchange rates. This would be the hope for lasting equilibrium in the system over the longer run.

(d) Willingness to help "buy" the package by permitting an orderly decline of our gold stock by another $2 billion, to about $8 billion.

2. Unilateral U.S. suspension of gold convertibility. This would force other countries to take action which would lead to one of the following:

(a) Greater flexibility of exchange rates and hence lasting adjustment of our position.

(b) Financing for the U.S. via dollar accumulation by others. It is the most likely route to a near-global "dollar standard".

(c) Imposition of controls by other countries to avoid (a) or (b). We would thus be back about where we started, except for the important difference that other countries would be applying the controls.

3. An increase in the price of gold which would increase world liquidity and hence provide some additional financing for the United States. It would achieve no other objectives and hence represent at best a temporary "solution" to the problem.

Political Assessment

The negotiated multilateral option is most consistent with our overall foreign policy. It would seek a solution through working together with our allies, mainly those in continental Europe. Success in this effort could mark a major milestone in building a truly cooperative Atlantic Community and represent a major foreign policy achievement for this Administration.

Either alternative approach would represent a unilateral move by the United States which would antagonize a number of major countries. It might thus be less costly, in political terms, to apply considerable pressure on the Germans and others in an effort to carry off key parts of the multilateral approach if by so doing we could avoid the need to use one of the unilateral routes.

This sharp distinction becomes very much blurred in practice, however. It will undoubtedly take a great deal of negotiated effort--including your personal intervention--to achieve a satisfactory solution through multilateral negotiation. This is because external constraints on the U.S. can be reduced to a safe level only if we get much greater allocation of SDRs than most Europeans want, much more realignment of exchange rates than most Europeans are willing to do, and much faster movement toward greater flexibility of exchange rates than most Europeans are even contemplating at the moment.

At the same time, we have already moved a long way towards suspension of the gold convertibility of the dollar. Germany has explicitly agreed not to convert (under the implicit threat of troop withdrawals as part of an earlier "offset" agreement). All other major countries are afraid to queue up for gold for fear that we will close the window. We are thus already achieving much of the gain from suspension--essentially through accumulation of dollars by others--while minimizing the political costs of blatantly unilateral U.S. action. We are compromising, however, because we maintain controls, offset agreements, tied aid, etc. to try to avoid a crunch by minimizing the amount of dollars that they will be forced to accumulate.

In addition, formal suspension could have a desirable political effect. It would force the Europeans to make the difficult choices which they can avoid under the present system. It might thus provide a major impetus toward closer European integration, much as our Kennedy Round initiative forced them to make basic choices on their trade policy. And it might even help UK entry since the continentals would feel forced to band together to "counter a unilateral U.S. initiative" and could well decide that maximum size was desirable in doing so. On the other hand, it must be recognized that they might not be able to get together and the result could be a further atrophy of the integration process with some of them linking to the dollar and others going their own way. 

The main political effect of either suspension or an increase in the gold price is to break a U.S. commitment which dates to 1934. It is not clear which would be worse from a foreign policy standpoint.

Suspension could cast doubt on the dollar value of countries' gold holdings but this is not very serious since the free market price of gold is above the official price. The main effect would be on the major gold holders: the continental Europeans, South Africa, and the Soviet Union.

An increase in the official gold price would break faith with all those who have helped us for a decade by holding large amounts of dollars, meaning most of the world outside continental Europe and even some of the latter (e.g. Germany). It would raise domestic political problems in many countries and the Japanese say that their government would fall if we raised the gold price.

I would guess that the short-term political costs of suspension might be greater, precisely because it would force the Europeans to make hard choices. But because they would have to make these choices and get the system reformed, suspension would probably lead to a better political result over the longer term.

An increase in the gold price would effectively eliminate the impetus to basic reform by appearing to solve the problem and would also stimulate general belief that any future crisis would be met by another gold price increase--increasing the instability of the system and the likelihood we could no longer get much, if any, dollar financing.

The key countries in any reform effort are Germany, because it is the strongest surplus country and will undoubtedly stay that way short of major new East-West tensions, and France, because of the desire of the rest of the Six for a common position. In fact, only France could probably play a leadership role in forging a common U.S. position since the others would fear and resent any German effort to "impose its view" and the others do not have the necessary strength. The UK is not a factor because it is financially prostrate and Japan simply does not play a role commensurate with its economic power.

The outlook for German cooperation is cloudy. Their recent decision not to revalue may be blamed on the coming election but it is not clear that they will move even thereafter. The Germans are also moving very cautiously on the size and even timing of SDR activation.

If Strauss remains important in financial affairs after the September election, there can be only a limited prospect of sufficient German cooperation to make the negotiated multilateral approach succeed. On the other hand, the bulk of informed German opinion--including many businessmen and bankers--are coming to understand that only upvaluation of the mark and greater flexibility of exchange rates will enable Germany to avoid inflationary pressures from abroad. SPD victory would hasten the likelihood of implementation of these views but even then it would be uncertain.

Pompidou's approach to these issues is certain to be less dogmatic than de Gaulle's and the weakness of France's external financial position will circumscribe him a great deal. Pompidou reportedly argued with the General that France should support SDRs and Giscard d'Estaing is one of the intellectual fathers of the scheme. Nevertheless, the French are unlikely to move very fast from the General's positions and will thus probably not accept large activations of SDRs, let alone move on to other basic reforms.

Issues for Decision

Political realities thus suggest that it will be extremely difficult to reach a negotiated multilateral agreement on a sufficient scale within a relevant time period unless the alternatives are clearly perceived as worse by the key Europeans.

There are three key operational questions:

1. Should we even attempt to pursue the negotiated multilateral approach and, if so, how long should we persist?

2. What should be our balance of payments policy while we pursue this approach?

3. If we abandon the multilateral effort, which alternative--suspension or an increase in the gold price--should we pursue?

The answer to the first question depends on the cost of pursuing that alternative. If we resolve not to let the present system constrain us seriously--meaning that we are prepared to move to one of the other options if it does--then I see no harm in doing so.

In practice, this means that we would answer the second question by continuing to reduce our controls over private capital and our aid programs and perhaps taking a more relaxed position on issues like the German offset. We would not let external pressures force us into policies undesirable in and of themselves. Resolve to pursue this course will require steady nerves.

If forced to move to one of the other approaches, I would opt strongly for suspension. I agree with the economic case made in the Kennedy paper and would add that it would seem to me less politically harmful in the longer run than an increase in the gold price--and by forcing the Europeans to face some difficult choices could perhaps even provide a new impetus toward European integration.


I therefore recommend that:

1. You authorize continued pursuit of the negotiated approach to international monetary reform. Specifically, we should:

(a) Seek a large amount of SDRs;

(b) Support exchange rate realignment without bringing coercive pressure;

(c) Provide crisis financing for the British as needed;

(d) Take a public position in favor of greater exchange rate flexibility as soon as our negotiators think the time is ripe.

2. You make clear that you are not prepared to purchase such agreement by tightening controls over the U.S. economy and our foreign policy, and that you wish to continue the process of relaxing those controls. We should pursue a passive balance of payments policy while pursuing the negotiations for monetary reform.

3. That you accept the recommendation of the Kennedy paper that we suspend gold convertibility of the dollar if the effort toward a negotiated multilateral solution breaks down or if we are forced to take defensive action as result of a crisis./4/

/4/Presumably at least Recommendations 1a, 1b, and 1d were approved during the June 26 meeting; see Document 140. Recommendation 3 was one plank in the New Economic Policy President Nixon announced on August 15, 1971.


Tab B

Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon/5/

Washington, June 25, 1969.


"Basic Options in International Monetary Affairs"

The "Basic Options" paper prepared by the Volcker Group is a clear and perceptive summary of the major international financial issues./6/

/6/See footnote 2, Document 130.


The Council of Economic Advisers, which has participated in the drafting of this paper, is in general agreement with its formulation of the options and with its recommendations. In particular, I agree that the evolutionary approach now being followed (option a) should be pursued. I take a more positive view of the merits of limited exchange rate flexibility than the paper does, but since the U.S. dollar would not move under such a scheme, our bargaining position in advocating this scheme is admittedly limited. It should nevertheless be stressed that our hopes of establishing a less crisis-prone international monetary system rest primarily on achieving limited flexibility. The fear that an endorsement of limited flexibility would further unsettle the foreign exchange markets seems exaggerated, and it tends to induce inaction on this matter.

I also agree with the paper in regarding the suspension of gold convertibility (option b) as a major break in international cooperation, and therefore not to be undertaken unless the evolutionary approach turns out to be unpromising. In particular, I do not support the view, implied in para. 56, that we should suspend convertibility if the other countries are unwilling to activate more than $2 billion in SDR's (Special Drawing Rights) per year. Although SDR's will no doubt be an important addition to international liquidity, this additional liquidity can make only a modest contribution to the adjustment process by which nations with different rates of price movements, different objectives of economic policy, and different rates of technological development adjust to each other. It is the present system's inability to effect these adjustments, by excessive rigidity of exchange rates, that is the main cause of current troubles. Consequently I do not believe that a large amount of SDR's, while desirable, should be regarded as the touchstone of success for the evolutionary approach.

I agree with the report's rejection of an increase in the gold price, whether large or small. If it ever comes to a choice between options b and c we should demonetize gold, which is what option b amounts to.


There are a number of points not fully covered by the paper which you may wish to pursue in the meeting on Thursday.

1. Public posture and Presidential leadership. The paper does not give you anything to say for public use, even though an insufficient sense of direction on the part of the financial and business community is a current problem. If you agree to the evolutionary approach, it might be desirable to recognize publicly that flexibility of exchange rates must be part of achieving a less brittle system. Of the two other components of the evolutionary approach, SDR's are by now somewhat shopworn and a realignment of parities cannot be mentioned in public.

2. Balance of payments controls. The paper does not hold out any hope for a further relaxation of controls in the immediate future. While maintenance of controls is seemingly justified by the precarious state of our balance of payments, it is not clear that relaxation must await a return to equilibrium. In fact it is not clear how much controls contribute to reducing the deficit, and they do come at a heavy cost in other matters. A subcommittee of the Volcker group is working on this subject and you may want to express an interest in its results. Indeed, we might want to consider a phased relaxation of controls as a major policy objective in its own right. If this puts a strain on the international monetary system, it would be evidence that the system needs modification. If we do not press forward here, the momentum generated by the April 4 relaxation may be lost, and this Administration may become no less committed to controls than its predecessor.

3. Sterling. Although I agree that for the moment (say, through the summer) sterling should hold at its present parity, it would be most unwise to supply Britain with further credit. This would require Congressional approval. And it is probably not in the interest of the United Kingdom to go even further into debt. Moreover, there are indications that sterling has a long-term tendency to depreciate, which makes it an ideal candidate for the so-called crawling peg form of exchange rate adjustment. Whenever the next sterling crisis erupts, Britain should be encouraged to adopt such a device in order to avoid resorting to direct controls.

Paul W. McCracken


132. Telegram From the Embassy in France to the Department of State/1/

Paris, June 30, 1969, 1100Z.

/1/Source: National Archives, RG 59, Central Files 1967-69, FN 10. Confidential; Priority; Limdis; Greenback. Repeated to the Embassies in G-10 capitals (sent to the Treasury representatives in Bonn, London, Rome, Tokyo, and USOECD in Paris) and to USEC.

9840. From Under Secretary Volcker and Governor Daane to Treasury Secretary Kennedy, for Petty and Dale, US Executive Director, IMF, and to FedRes for Chairman Martin. Section I of II.

Subject: Meeting of Deputies of G-10-SDR Activation, June 28./2/

/2/George H. Willis was a member of the U.S. delegation. His handwritten notes on the meeting are in the Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Willis Notes. SDR activation was also discussed in the OECD's WP-3 June 27-28. A report on the WP-3 meeting is in telegram 9836 from Paris, June 29. (National Archives, RG 59, Central Files 1967-69, FN 10 1 IMF)

1. Outcome of first full day's negotiations on SDR's satisfactory, with a number of European delegations adopting initial negotiating position at somewhat higher level than anticipated.

2. Chairman (Ossola, Italy) summarized initial positions, characterizing them as not firm national positions, but indications of emerging national positions, as follows (amount per annum in billions of dollars, followed by number of years for first decision):

U.S.--4.5-5 years (strong presumption)
Netherlands--2.0-5 years (preferably with low first year)
Germany--3.0-2-3 years
Italy--3.0-3 years
Belgium--2-2-1/4-2 years
Japan--3-4-2 years
Sweden--3.0 plus-5 years (tolerate 3 years)
U.K.--middle figure-2-5 years (with large initial year)
Canada--upper range-5 years
France--not participating
Switzerland--not participating

3. Chairman stated general consensus in favor of activation around time of September annual meeting of IMF. This required Group of Ten to reach decision by end August to be communicated to Managing Director of IMF as part of consultations preceding his formal proposal. Either Deputies (acting for Ministers) or Ministers might have to meet in late August if matter not settled in July. Belgian Deputy entered only reservation among participants as to ability to commit his government within a few weeks. General preference for settling matter in Deputies if possible, with British and French making strong plea against Ministerial meeting. U.S. took position they strongly hoped Ministerial meeting could be avoided, but were fully prepared for such meeting if required to reach agreement.

4. For guidance U.S. Missions in discussions of subject with officials, our view is that satisfactory consensus can be reached in July, or latest in August. It is natural that initial discussion of activation amounts shows some range in initial positions. We continue to believe that $4.5 billion a year for five years is amount called for (a) to achieve reasonable reserve growth objectives of both industrial and developing countries, (b) to facilitate adjustment process, and (c) to assist in repayment of reserve credits extended in past five years. Further progress toward this view is needed, but seems achievable as various governments focus on arithmetic of reserve needs and its implications.

5. FYI: A number of delegations accepted $4.5 billion a year as amount of new reserves needed in all forms, but deducted anticipated net new reserve creation due to anticipated resumption U.S. official settlements deficits and possible net growth of reserve credit. This contrary to our projections, which imply net reductions in reserves on these two counts taken together. Further negotiations will explore these differences of view. At this point we believe that possibilities of agreement between present German-Italian $3 and $4-1/2 billion in early years are good, and that we can hope to reach some agreement for full period of five years. In latter connection Japanese have emphasized and we concur that it is important that legal staff of Fund produce promptly paper on options open to Fund to adjust allocations for later years to allow for subsequent selective quota increases. End FYI.

6. We understand Finance Ministers of European Community meet on July 21-22 prior to Deputies' meeting July 23-24. U.S. Missions should bear in mind importance of meeting of the Six and our interests in avoiding inflexible EC group position. Believe Italians and Germans will be sympathetic to desirability of retaining flexible negotiating position at reasonable levels of SDR activation.

7. Section II will follow on subject of IMF quota increase./3/

/3/Section II was sent in telegram 9871 from Paris, June 30. Governor Daane reportedly argued "that issues involved in working out quota increase very complex and delicate, and should not be allowed intrude on priority business of SDR activation." Paragraph 3 reports on a short discussion of Italian Minister Colombo's proposal for an SDR-aid link. The Netherlands, Belgian, French, Canadian, Swedish, and Japanese representatives reportedly all said they had great conceptual difficulties with the link. Governor Daane shared their concern but felt "that in case of some donor countries voluntary pledges of type suggested by Colombo could be appropriate, and that Group should continue study how achieve without linking liquidity creation and capital requirements." (Ibid., FN 10)



133. Volcker Group Paper/1/

VG/WG II/69-24

Washington, July 16, 1969.

/1/Source: Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/WG II/69-14-VG/WG II/69-35. Confidential. The paper is marked "Willis Draft." VG/WG II/69-24 was circulated to members of the Volcker Group and Working Group II under cover of a July 17 memorandum from Willis indicating the draft paper would be discussed at a 4:30 p.m. meeting of the Group that day, prior to the meeting of the G-10 Deputies in Paris July 23-24.

July 17, 1969

SDR Activation

The following alternatives are suggested for the consideration of the Volcker Group:

Alternative A--Minimum Position

$4 billion in Year I; $3 billion in Years II and III; Years IV and V left open, but with understanding that decision will be made on Years IV and V no later than the September Annual Meeting in 1971.


Chairman Ossola of the Deputies appears to have indicated some willingness to try to reach agreement on this proposal, if it would be acceptable to the United States. The United States has not given him encouragement to do so. The amount, totaling $10 billion in three years, is somewhat larger than the figure of $3 billion for two or three years mentioned by the German Delegation at the June Deputies Meeting. It is considerably above the Belgian and Dutch figure, though it applies to a shorter period than the Dutch proposal. It could conceivably be defended by the Europeans as coinciding with the $10 billion figure discussed last year, even though telescoped into a shorter time period. It is conceivable that, if the Finance Ministers of the Six do not agree on a more stringent position in their meeting on July 21-22, this alternative could be accepted by the Deputies without an August Deputies Meeting or an appeal to the Ministers. It is not certain that this could be done, however, because of Dutch and Belgian resistance. There is no clear additional sweetener for the Dutch and Belgians, unless it lies in support for a conservative approach to quota increases, discussed below.

Alternative B--Intermediate Position

$4 billion in Year I, $4 billion in Year II, and $4 billion in Year III. Decision Years IV and V no later than September 1971.


This position would result in $2 billion more of SDRs than Alternative A in the first three years. The U.S. share would be approximately $500 million, or conceivably more if some members of the Fund did not participate in the SDRs. (It is assumed in Alternatives A & B that the amount of activation is fixed absolutely, and would not be increased if additional participants joined in at a later date.)

While this position might conceivably be sold to the Europeans in July, it seems more likely that adoption of Alternative B would lead to a Deputies Meeting at the end of August 1969, for further negotiation. An important question is whether the U.S. is likely to lose or gain if agreement is postponed in July.

There are several reasons why postponement may prove disadvantageous to the U.S. In the first place, allowing more time to elapse before committing the European Deputies permits opposition elements in those countries to organize more effective pressure against a substantial activation figure. This opposition may result from political rivalries, electoral strategy, or genuine fear that a large activation would contribute to inflation or unduly impair international monetary discipline. In the second place, by mid-August, if not earlier, the unprecedentedly large U.S. liquidity deficit will become known to the Europeans. This could be embarrassing to the European Deputies who are most inclined to take a liberal view of activation, and cause them to be less venturesome in leading their own governments. It appears to be well substantiated, for example, that Emminger, Schoellhorn and Schiller have already mentioned activation figures which are about twice as high as the figures generally talked about in other German Ministries and at lower levels in the Bundesbank.

On the other hand, the possible advantages of deferring a decision until August relate to the uncertain results of an appeal to Chancellor Kiesinger during his August 7 visit to Washington and a judgment as to the effectiveness and usefulness of a threat to insist upon a Ministerial Meeting at the end of August.

Alternative C

In this alternative a different approach would be taken arithmetically. The amount proposed for SDR activation would be based on the assumption that all members of the Fund would participate, and the amount would be written down proportionately if the actual participation were less than 100 percent of IMF membership. If at a later stage other countries opted in, the amount allocated would be increased and the same procedure would be followed if there were selective quota increases. This means that the figures cited would not be a maximum, but could be exceeded if there were selective quota increases, though presumably not by a large amount. Under this alternative, the U.S. might propose $4-1/2 billion a year for three years, with decision on Year IV and Year V to be taken before September 1971. The United States share would be about $1,125 mil., and would not vary depending upon the number of participants in a given year or the adoption of selective quota increases.


It may be recalled that the United States at present has legal authority to participate during the initial activation in an amount up to our present quota of $5,160 million. Over a five-year period, an annual allocation of $1,125 million a year would be beyond our present authority. This was pointed out to Mr. Dale by the Japanese Executive Director, whose legislation apparently parallels ours. This may be true of some other countries as well. For this reason it would be desirable to reduce the U.S. asking figure to bring it within our present legal authority. In this alternative, this is done by reducing the period to three years.

This alternative also would quite probably mean no agreement at the July meeting and a continuation of negotiations in August. At the August meeting the United States would probably have to move toward Alternative A in order to reach agreement, by reducing the amount. Under no conditions should the U.S. agree to any activation period shorter than three years.

The considerations noted in Alternative B above would apply to this alternative.

Alternative D

In the initial discussion in the Executive Board, Mr. Schweitzer suggested the possibility of an allocation for five years at the mid-point of a range between $2.5 billion a year and $4.0 billion a year, or about $3.25 billion a year for five years. He indicated that an additional amount might be added at the beginning of the period to make up for deficient permanent reserve creation in recent years.


The Fund Staff has been very reluctant to give up the principle of five-year allocation. The reasons cited for this view are that:

(a) three years is too short a time to provide adequate experience with the reconstitution provisions and with the SDR transactions in general, and

(b) the governments would find themselves in a rather awkward position to take a decision for the remaining two years without casting doubt on the value of the SDR, if the annual allocations were reduced.

A possible unspoken consideration is the desire to associate SDR allocations with quinquennial quota increases.

Alternative Positions on IMF Quota Increase

While the United States would have preferred to postpone a substantive decision on the amount of general and selective quota increases in the Fund, it now looks as though it may be necessary to reach a substantive agreement on the main outlines of a quota increase in order to settle the issue of SDR activation in July or August of this year. Several alternative U.S. approaches are briefly summarized below.

Alternative A

General increase of 15 percent in IMF quotas with selective increases totaling not more than 10 percent of present quotas, or about $2.1 billion. The United States could either (1) take no selective increase, (2) take enough increase to maintain its voting power, or (3) take its proportionate share of an overall 10 percent figure for world-wide selective increases. It is estimated that Alternative A (1) might result in gold sales of about $600 million, with Alternative A (3) adding another $75 million, for the U.S. selective increase, for which the United States would receive gold tranche claims. A 15 percent increase in our gold tranche would amount to about $193.5 million. The net reserve loss we could suffer could therefore be about $400 million, though our conditional drawing right would be enlarged by about $775 million. These estimates are based on the assumption that about 18 countries would not convert dollars into United States gold to make the requisite payments to the Fund, but would use their own resources.


This approach follows the suggestions of major European countries at the last meeting of the Deputies. It should be readily saleable to the Europeans, but could encounter rather strong opposition from the IMF staff and the Executive Directors of the non-Ten countries. Mr. Dale indicates that the Executive Directors of these non-Ten countries appear to be insistent on a 20 to 25 percent general increase for their own countries. While he does not think that they would openly refuse to go along with SDR activation if we supported Alternative A, the Europeans would probably realize that no agreement on quotas might be reached on this basis, at least without long and acrimonious negotiations. This might affect the willingness of the French, Italians, Japanese and Canadians to reach an understanding on SDR activation.

Alternative B

Under this approach there would be a general increase of 15 percent for the members of the Group of Ten plus not more than their share of selective increases totaling globally no more than 10 percent of existing quotas, or about $2.1 million. The rest of the world, however, would receive uniform quota increases of 20 percent, plus a proportionate share of the overall 10 percent selective increase.

We would estimate that this alternative would cost the United States approximately $770 million in gold, with our gold tranche and credit tranche drawing rights the same as in Alternative A above.


Mr. Dale has advised me/2/ that this suggestion has come up recently in the IMF staff, in an effort to deal with what is felt to be a European objection to a substantial increase in the United Kingdom quota. It is also felt that the United Kingdom is not enthusiastic about a substantial rise in its quota.


The advantages of this approach would be to satisfy both the Europeans and the non-members of the Ten with respect to the size of their general quota increases.

On the other hand this approach continues and emphasizes a trend in the Fund towards expanding the drawing rights of the non-G-10 more rapidly than those of the Group of Ten countries, and thus probably reduce the liquidity of the Fund. To some extent this tendency would be offset by large selective increases to some G-10 members. The United Kingdom would find its voting power reduced, and the United States would also be in this position unless it elected for some share in the selective quota increases. To maintain its voting power, it would need to take a selective increase of something like $400 million. It is also worth bearing in mind that a reduction in the relative share in IMF quotas for the United States means over time a fairly significant cumulative loss of SDR allocations, which are proportionate to relative quota shares.

Alternative C

A uniform general increase of 20 percent for all members, accompanied by selective increases not exceeding 10 percent of existing quotas or about $2.1 billion. Again the United States would have three options open to it with respect to its own selective quota.

We estimate that this approach would cost the United States approximately $810 million in gold sales to the Fund, against which the United States would receive an additional gold tranche claim of $258 million plus any allowance for selective increases, and additional credit tranche drawing rights of $1032 million plus any adjustment for a selective quota increase.


This approach would maintain the principle of uniform treatment of all IMF members for a general quota increase, and could probably be made acceptable as a minimum figure to the Executive Directors of non-G-10 countries.

On the other hand some difficulty might be encountered in gaining European acquiescence to such a figure, resulting in European delay in decision on SDR activation on this score. Adoption of this position might increase the likelihood of an appeal to Ministers to resolve the SDR and quota questions, although it is true that in the past the Europeans have proved reluctant to maintain a strong position in the face of a fairly determined stance on the part of the developing countries.

Alternative D

This would be a frankly compromise position, calling for a general quota enlargement of 17-1/2 percent, midway between the European maximum and the indicated minimum of the non-Ten countries. As before, the selective increases would be held within 10 percent of quotas.

We estimate the United States gold loss under this alternative at about $750 million. Our gold tranche claim would rise by about $225 million, plus any allowance for selective increases and our credit tranche drawing rights by something over $900 million, plus adjustment for a selective quota increase.


This alternative would preserve the principle of uniform treatment of IMF members in general quota increases. It would appear to be a reasonable compromise between the initial positions of the two factions and the Fund.


134. Telegram From the Embassy in France to the Department of State/1/

Paris, July 24, 1969, 1850Z.

/1/Source: National Archives, RG 59, Central Files 1967-69, FN 17. Confidential; Priority. Repeated to Bonn, Brussels, The Hague, London, Rome, and USEC.

11272. Subj: July 23 call on Pompidou: international economic and monetary situation.

1. Pompidou said at our July 23 meeting that the most urgent problem facing the West at this point was the international economic and monetary situation, and in that general picture the strength and position of the dollar was crucial. He alluded specifically to the so-called French war against the dollar and smilingly he said that the possibilities of any such war at this time were non-existent; that the franc was in no position to challenge the dollar; and that, in fact, the economic strength of the US and our determination to prevent inflation and protect the status of the dollar was crucial to all the Western countries. [Omitted here is a discussion of the Euro-dollar market and domestic economic policy in the United States.]

3. I asked Pompidou whether the French would be of a mind to facilitate international monetary equilibrium by participating in the Special Drawing Rights. Pompidou responded that there were two aspects to this question: one was the principle involved, and the second was the quantity. With regard to the principle, he pointed out that France has consistently emphasized the usefulness of gold as an instrument which enforces discipline. He himself was not a devote of the extreme theories on gold: i.e., he was not a doctrinaire supporter of Jacques Rueff's ideas, but that in lieu of gold, self-disciplinary actions had to be taken. In this connection, of course, he reemphasized the necessity for US to do something because the whole of the Western world's economic and monetary situation depended upon US and not upon actions taken by anybody else. In response I repeated my personal conviction that the US had already taken a number of significant actions to stem inflation and that our country was preparing to take even more. And in this connection I pointed out that Under Secretary Volcker would be meeting with Finance Minister Giscard d'Estaing today/2/ and that I was sure Volcker had ample authority to provide the French Government with all of the current details as well as the philosophical foundations of our policy.

/2/During his July 24 meeting with Volcker, Giscard d'Estaing "asked how, in a world beset with inflation, it was possible to justify the creation of liquidity in additional large amounts through the SDR method." He continued nonetheless to say that when he attended the annual meeting of the IMF and the IBRD at the end of September in Washington he planned "to state a French position in favor of SDRs, and he would prefer doing so first in the less formal atmosphere of the Group of Ten." (Memorandum of conversation; Washington National Records Center, Department of the Treasury, Files of Under Secretary Volcker: FRC 56 79 15, France) On June 26 an April 28 research paper prepared in the Federal Reserve Bank of New York was circulated as VG/WG 11/69-14 to Members of the Volcker Group and Working Group II. (Ibid., Volcker Group Masters: FRC 56 86 30, VG/WG 11/69-14-VG/WG II/69-35) The research paper contained an analysis of an article by Giscard in the March 1969 edition of L'Expansion in which Giscard compared his 1964-1965 proposal for a collective reserve unit (CRU) with the SDR and strongly supported SDRs and opposed any change in the price of gold. In a July 2 letter to Ambassador Shriver, Samuels called Giscard "the father of the present SDR arrangement," because the CRU, although different from the SDR, "envisaged liquidity creation to be a matter of international agreement." (National Archives, RG 59, Central Files 1967-69, FN 10 IMF)

4. On this subject Pompidou appeared to me like a man who wants us to succeed in our own struggle for economic stability and as a person who would react favorably to the SDRs if and when he saw sufficient disciplinary actions on our part to overcome any doubts his own theorists might have stemming from their preoccupation with gold. He gave me the impression that we were dealing more with a Rothschild banker than with a Sorbonne professor of economics. In other words, I gained the impression from Pompidou's rather jocular manner in referring to the gold theorists in France, but not from any explicit statement he made, that Pompidou is searching for practical answers to the practical monetary problems, and that he is not going to insist on a change of the price of gold in the doctrinaire way in which de Gaulle and Jacques Rueff did.



135. Telegram From the Embassy in France to the Department of State/1/

Paris, July 25, 1969, 1230Z.

/1/Source: National Archives, RG 59, Central Files 1967-69, FN 10. Confidential; Priority; Limdis; Greenback. Repeated to the Embassies in G-10 capitals (sent to the Treasury representatives in Bonn, Rome, Tokyo, and USOECD), and USEC.

11295. From Under Secretary Volcker and Governor Daane for Treasury Secretary Kennedy, for Petty and Dale, US Executive Director, IMF, and to FedRes for Chairman Martin. Subject: Meeting of Deputies of G-10-July 23-24.

1. Deputies of Group of Ten carried on day and a half of hard bargaining over question SDR activation and IMF quota increases which ended in consensus on both matters, subject to Ministerial approval.


2. As summarized by Chairman (Ossola, Italy), agreement on SDRs is as follows:

(A) For first period of activation of three years global amount to be created of $9.5 billion, of which $3.5 billion in first year and $3.0 billion per year in second and third years./2/

/2/In a July 26 memorandum to the President, Acting Chairman of the Council of Economic Advisers Herbert Stein wrote: "While the agreement does not give as much as we wanted [see Document 133], it is nevertheless considerably better than anyone would have expected six months ago. This is due in large measure to European confidence that the U.S. will bring inflation under control. It also reflects the persistence and bargaining skill of Treasury Under Secretary Paul Volcker. With the SDR agreement the part of your April 4 call for international monetary reform [see footnote 5, Document 16] that deals with liquidity has been advanced decisively. The other part, improving the adjustment process, is as necessary as ever but has not yet been pushed. Now that the SDR question is settled and the markets are quiet it would be a suitable moment for Secretary Kennedy to make the speech on international monetary reform that was agreed upon at the meeting of June 26 [see Document 131]." The accompanying undated cover memorandum from Kissinger to President Nixon indicates that Stein's memorandum did not go to the President. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers)

(B) Representatives of all countries having accepted amendment (this formulation designed exclude France, which did not associate itself with decision--see para 4 below) have declared their willingness strongly to recommend these figures to their authorities and to confirm Ministerial approval within one week./3/

/3/Telegram 125335 to Rome, July 29, reported that Volcker confirmed to Ossola, on behalf of Secretary Kennedy, U.S. agreement to the consensus on SDRs and increases in IMF quotas. (Ibid., RG 59, Central Files 1967-69, FN 10)

(C) Agreement will be considered to be in effect when approval received from all parties. At this point Ossola will notify participants and, with approval of German Economics Minister Schiller as Chairman of G-10 Ministers, will inform IMF Managing Director Schweitzer, who under SDR amendment to IMF articles makes formal proposal for activation after consultations, of which G-10 consensus is one element.

3. During negotiations leading up to consensus, Common Market (minus France) first put forward proposal for $2.5 billion per year for three years. U.S. pulled them up to $3 billion per year for three years and in final round of bargaining got first-year figure up to $3.5 billion in interest of psychological effect on exchange markets. While all nine parties to agreement will confirm Ministerial approval to Chairman Ossola, in fact only four are on ad referendum basis: U.S., Canada, Germany and Netherlands.

4. Strictly FYI: As indicated para 1 above, France did not associate itself with agreement. However, informal talks suggest French adherence in September, although agreement on figure which is relatively high by Common Market standards may introduce complication into this timetable.

Quota Increase

5. Chairman proposed consensus along following lines. Members of G-10 will support an over-all increase in quotas in the order of magnitude of 30 percent (plus or minus three percentage points). This would support selective increases that would bring quotas more in line with the economic position of countries. Chairman said this consensus also implied (A) that quotas should be raised as soon as possible and that annual SDR allocations would then reflect the new quota distribution and (B) that the increase in quotas should not affect the General Arrangements to Borrow.

6. In discussion, Van Lennep (Netherlands) made effort to narrow the parenthetical range of 6 percent with 30 percent as center to range of $28.5 billion to $31.5 billion. Daane (U.S.) stressed need for wider 27-33 percent range to have needed flexibility to work out individual quotas in IMF executive board. Van Lennep accepted wider margin on interpretation by Morse (U.K.) that restraints to increases would increase as figure moved farther from 30 percent within 6 percent range.

7. De Strycker (Belgium) stressed that the consensus (A) did not imply any approval of the "split-level" method of general increase or any other formula for dividing total quota increases; (B) no understanding was implied as to any specific national quota increase and none was approved; and (C) no quantitative figure of any kind was being approved, except the 30 percent order of magnitude. Daane (U.S.) supported Belgians and entered reservation as to any sharp reduction in U.S. own relative share, such as that shown in some Fund tables that had been discussed on previous day. While we would accept the over-all 30 percent with its range, the only agreement on individual quotas that we would accept was that we would inform our Executive Director as to specific quantitative position on all figures. Larre (France) complained that G-10 should be more specific, and that increase of 33 percent was needed to reach over-all increase of $7 billion. Larre felt that consensus left too much flexibility. Chairman, nevertheless, concluded there was consensus on the flexible position he had outlined.

Press Relations

8. Chairman pointed out it would be impracticable expect that he and other Deputies could avoid saying anything to press re outcome of meeting. He therefore proposed common line, which was agreed as follows:

(A) No figures will be released either on amounts or time period, in deference to position of G-10 Ministers, who must approve Deputies' consensus; IMF Managing Director, who must make formal proposal for activation; and non-G-10 members of Fund. (It was, of course, recognized figures will certainly become known to press.)

(B) It would be indicated simply that Deputies have reached consensus--subject to approval by Ministers--on SDR activation and on size of over-all increase in IMF quotas within framework of quinquennial review of quotas. After Ministerial approval, this consensus will be communicated to IMF Managing Director, and it will be for him to take into account within context of his world-wide consultations on activation.

(C) Would be indicated that "one country which has not accepted SDR agreement" (i.e., France) has not associated itself with consensus.

9. In view of fact that agreement has not yet been approved by Ministers, and sensitivity of Europeans on this point, it is extremely important that U.S. spokesmen not indulge in unauthorized release of figures.

Next Meeting

10. Next meeting of Deputies scheduled take place in Washington on Sept 27 with following tentative agenda: (A) draft communique for meeting of G-10 Ministers and Governors; (B) election of new Chairman of Deputies; (C) brief discussion of future work program of Deputies. G-10 Ministerial meeting tentatively scheduled for afternoon October 1 in Washington.



136. Editorial Note

France devalued the franc by 11.1 percent on August 8, 1969. German Chancellor Kiesinger was in Washington at the time, and Henry Kissinger sent President Nixon a brief memorandum on August 8 asking him to discuss the devaluation with the Chancellor before he left Washington. (National Archives, Nixon Presidential Materials, NSC Files, Country Files--Europe, Box 675, France, Volume III Jan 69-10/31/69) No record of any discussion with Kiesinger on the franc devaluation and his plans for the mark was found.

Policymakers considered the impact of the franc devaluation on other currencies, including the dollar. In his August 9 weekly report on international finance to the President, Council of Economic Advisers Chairman Paul McCracken thought the dollar would be unaffected, doubted the mark would be appreciated, mused on how much support the United States should give the pound, and wondered how the devaluation would affect planning for Secretary Kennedy's speech on monetary reform, including improvement in the exchange rate system. (Ibid., Box 215, Council of Economic Advisers) (Regarding Kennedy's speech, which was given on September 30 at the annual meeting of the IMF and IBRD in Washington, see footnote 7, Document 139.) The opinion that the mark would not be revalued until after the German elections in September proved correct. Following heavy speculative flows on September 22 and 23, Chancellor Kiesinger on September 24 called for a closing of German foreign exchange markets through the election on September 28, and the mark was allowed to float on September 30.

According to a September 3 memorandum from Secretary Kennedy to the President, foreign exchange market issues had been discussed during a Quadriad meeting on August 28 in San Clemente. For the President's information, Kennedy attached an undated Contingency Planning paper to his September 3 memorandum, which, inter alia, recommended providing up to $500 million in support for the pound. The paper also indicated that contingency plans were being developed to suspend the dollar's convertibility to gold, and recommended that the United States should be prepared for prompt action, but that the gold price should not be increased. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I) A copy of the Contingency Planning paper, with the handwritten date of May 1969, is also in the Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning 1965-1973. Kennedy's September 3 memorandum went forward to the President attached to Kissinger's September 24 memorandum on policy options, Document 139.

Kissinger concluded a September 6 memorandum to President Nixon transmitting another weekly international finance report from Chairman McCracken to the President with a paragraph explaining that the Treasury Department had backgrounded key financial writers on Secretary Kennedy's forthcoming speech on international study of greater exchange rate flexibility. He referred to a New York Times front-page story of that day that noted the President's personal involvement in the initiative. He concluded: "we are now fairly clearly on the record as seeking a negotiated solution to one of the key problems of the system." (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers)

A draft of Kissinger's September 6 memorandum to the President was sent telegraphically to Alexander Haig in San Clemente on September 4 with a reference to a memorandum discussing unilateral actions, presumably an undated and unsigned memorandum from Kissinger to the President entitled "The Imminent International Monetary Crisis." The memorandum discussed scenarios for suspending the convertibility of the dollar to gold; there is no indication that it went forward to the President. (Both ibid.)


137. Memorandum From the Chairman of the Council of Economic Advisers (McCracken) to President Nixon/1/

Washington, September 8, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Confidential. This memorandum was sent to the Treasury Department under cover of a September 9 memorandum from Ken Cole. It is attached to a copy of Secretary Kennedy's September 19 memorandum to the President (Document 138). A September 8 draft, which forms Tab D to Document 139, is identical to the text printed here but without the final paragraph. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers)

A U.S. Initiative on International Monetary Reform

In the remaining weeks prior to the German election, it is evidently important to avoid initiatives which might be construed as exerting pressures on the German electorate./2/ It is no less important, however, to maintain the momentum which has been built up for international monetary reform, to assert U.S. leadership, and to prevent the reassertion of natural tendencies to avoid rocking the boat while nebulously hoping for the best. As decided at your June 26 meeting,/3/ a major initiative towards greater exchange rate flexibility should be presented at the IMF meetings (which take place immediately after the German elections). While avoiding advocacy of any particular scheme, this initiative should suggest that the United States considers such a reform to hold promise for eliminating some of the patent defects in the present system.

/2/The election was scheduled for September 28.

/3/See Document 131.

Because of the central position of the United States in the international monetary system, and our great interest in monetary stability, it is essential for us to provide leadership in the quest for a better adjustment mechanism. Without our leadership, there is a tendency for other countries to hold back from innovations. At the same time, we should recognize that, because we want the dollar to remain the pivot of the entire system (and hence not subject to flexibility), we would in effect be suggesting to other countries that they consider amending their exchange rate policies without our having to make a similar change. In this situation, it is appropriate for us to make our view clear, but to avoid exerting strong pressures on other countries to adopt the innovations which we consider desirable.

The circumstances are favorable for a U.S. initiative at the IMF meeting later this month. There is widespread recognition that present methods of balance of payments adjustment are inadequate. The exchange markets are temporarily quiet, but strong doubts about the future of the German mark and the pound sterling remain. The liquidity problem has become much less urgent, thanks to the recent agreement on Special Drawing Rights./4/ Several authorities in Italy, Germany, Japan and France have expressed interest (sometimes amounting to explicit advocacy) in greater flexibility of exchange rates. American businessmen and bankers have become increasingly aware of the disadvantages of frequent monetary crises and are willing to consider alternatives to present arrangements. The press is full of rumors and speculation on our official attitude towards reform.

/4/See Document 135.

Finally, I should mention that a U.S. initiative on the exchange rate mechanism would be truly an achievement of your Administration. Although the final agreement on international liquidity was completed this year, the original initiative is generally credited to the previous Administration. Consequently unfavorable comparisons would be invited if we did not come up with new ideas at the IMF meeting. Needless to say a more compelling argument for these ideas is that they will serve our own interests and those of the world as a whole.

Accordingly, I suggest that the Administration make a strong and forward looking statement, at the forthcoming annual meetings of the International Monetary Fund, on needed changes and strengthening of the international monetary system. Secretary Kennedy could make such a statement timed to avoid any relationship to the German election. It would, I believe, be received sympathetically by member nations generally.


Paul W. McCracken


138. Memorandum From Secretary of the Treasury Kennedy to President Nixon/1/

Washington, September 19, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I. Confidential. An attached September 24 note from Haig to Bergsten requested, "as a matter of urgency, a cover memorandum from Henry to the President," presumably Document 139, to which a copy of this memorandum is attached as Tab E. Another copy is attached to a copy of the September 8 memorandum from McCracken to the President (Document 137) proposing a more forthcoming approach at the IMF and IBRD annual meeting, and this memorandum by Secretary Kennedy is presumably the Treasury Department reply.

U.S. Initiative on International Monetary Reform

 We have now had an opportunity to sound out our partners in the Group of Ten on their likely reaction to a U.S. call for study of limited exchange rate flexibility at the forthcoming World Bank/International Monetary Fund Meetings. Their responses, as given to Under Secretary Volcker on a trip to Europe and as volunteered by central bankers meeting in Basle,/2/ are summarized in the attached table.

/2/Volcker's itinerary has not been fully identified, but he apparently met with Chancellor of the Exchequer Roy Jenkins. (Paul A. Volcker and Toyoo Gyohten, Changing Fortunes: The World's Money and the Threat to American Leadership (Times Books, 1992), p. 69) The reference to the central bankers meeting is presumably to a meeting of the Bank for International Settlements attended by Daane and possibly Volcker as well.

As you can see, in official circles there is widespread reluctance to deal with this issue. Except for the Italians and certain of the German officials, financial authorities in the rest of the Group of Ten countries are currently opposed to greater exchange flexibility in substance, and some are fearful that even study of the issue will be destabilizing.

To some extent, the adverse tone of the comments was an outgrowth of some unfortunate leaks to the U.S. and foreign press about our intentions,/3/ which failed to place the matter in appropriate perspective. In substance, the opposition has differing origins. Some officials simply think that greater exchange rate flexibility will create more problems than it will solve. Others, particularly those whose currencies are under pressure, are concerned that open discussion of greater flexibility will expose them to increased speculation and reserve losses. Still others are suspicious of our motives in raising this issue at this time, reading into our interest in exchange rate flexibility a defeatist attitude toward dealing with our internal inflation.

/3/Not further identified.

In contrast to these foreign official views, greater exchange rate flexibility has wide support in the academic community, has attracted interest in the business community, and has strong appeal to certain members of Congress. In the end, I believe most--if not all--of the leading countries will accede to our request for international study. I believe that our interests, and indeed theirs in the longer run, will be served by proceeding with such an exercise. However, the foreign official response does emphasize the importance of proceeding in this matter with considerable care respecting the reservations and sensibilities of our friends to elicit their cooperation.

For that reason, in asking for study, I plan to emphasize (1) that careful study is required, and this means that no one need fear early and potentially disturbing changes; (2) that we do not have preconceived ideas as to the "best solution"--at the same time we must rule out certain alternatives that would clearly be unworkable or work to the disadvantage of the United States; and (3) that the U.S. does not look upon greater exchange flexibility as an alternative to continued pursuit of anti-inflation policies domestically. I am now working on a draft speech for the Bank/Fund Meetings which I trust will make these points clear.

David M. Kennedy




Concept of Flexibility

Willing to Study





Strongly opposed

Yes, but dangers


Split internally; strong pressures on both sides



Minister's position uncertain; technicians opposed






Strongly opposed

May oppose


Strongly opposed












Strongly opposed



139. Memorandum From the President's Assistant for National Security Affairs (Kissinger) to President Nixon/1/

Washington, September 24, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 215, Council of Economic Advisers. Secret.

International Monetary Situation--U.S. Policy Options

Secretary Kennedy has provided you with a contingency paper on the international monetary situation (Tab C)./2/ He regards it as an information memo, not requiring action at this time, although it does make several specific recommendations. It has not been approved by any other agencies. (See cover note at Tab B.)/3/ Paul McCracken has also written to you on the subject (Tab D)./4/

/2/Not printed, but see Document 136.

/3/Tab B, not printed, is Kennedy's September 3 memorandum to the President; see Document 136.

/4/See Document 137 and footnote 1 thereto.

Present Situation

Another major international monetary crisis is quite possible in the next few weeks.

Speculation that Germany will revalue after its election on September 28 has already begun to precipitate massive new inflows into Germany ($1 billion in the last two weeks) and they are likely to accelerate immediately after the election. The SDP, which openly favors revaluation, is doing well at the polls and there is a growing belief that it may gain in strength. This would give it a greater voice in an eventual coalition government, which is still the most probable outcome. There will be widespread speculation whoever looks like a winner, however, because the economic (if not the political) case for revaluation is so clear.

The UK and Belgium continue as the potential weak spots, although the UK is doing well for the moment as the result of good trade figures.

Italy is the latest problem, losing $250 million so far this month. Sweden has also been suffering losses which are large for it. And France has begun to lose again, only a month after its devaluation.

Any of these countries might conclude--as did France last month--that it is useless to defend exchange rates which are unviable in the long term without German revaluation. If any of them devalue or float their exchange rates, numerous other countries would follow. Only a few countries beside Germany could then avoid devaluation. The result would be a severe disruption of the international monetary system and a further weakening of the U.S. competitive position, already jeopardized by inflation.

Strategic Choices and Broad Options

We face a strategic choice whether to attempt to forestall the development of a monetary crisis or to let it develop and respond afterwards. We have three options under each of these two strategies. We cannot approach Germany just before its election, of course, and our ability to do so thereafter will depend on the balance of political forces which emerges from it.

Preventive Action

1. We could pressure the Germans for immediate revaluation.

2. We could seek immediate assurance that revaluation will be undertaken as soon as it becomes possible politically and finance weak countries through the interim period.

 3. We could urge weak countries to hold their exchange rates even without any assurance of German revaluation, financing them as necessary, and be prepared to press Germany very hard on revaluation after a new government is formed. (This could require much larger loans than Secretary Kennedy mentions.)/5/

/5/Secretary Kennedy mentioned up to $500 million for sterling; see Document 136.

Response to Crisis

4. We could suspend convertibility of the dollar into gold as soon as we learned that any major country planned to devalue or float, announce our support for any sound currencies under pressure, and call for basic reforms of the monetary system. This would be an effort to pre-empt the collapse of the system by heading off the initial trigger.

5. We could suspend gold convertibility of the dollar in response to a forced devaluation or float of the British pound or another major currency, declaring our readiness to support financially other major currencies while basic reforms of the system are worked out. This would be an effort to limit the scope of the breakdown of the system. Secretary Kennedy's paper implicitly favors this course.

6. We could suspend gold convertibility of the dollar after devaluation or floats by a number of the countries calling for urgent reform to regain stability. This approach would be the easiest to justify and would minimize charges of a unilateral U.S. "power play."

7. We could doubleor possibly triple the official price of gold.


We cannot decide on a precise course of action in advance of the crisis. However, we should have a clear idea of the direction in which we want the international monetary system to move and, in light of that, how we should respond in a crisis situation.

You therefore need an interagency paper on the options we face and our choices in choosing among them. And you need it soon, because the crisis may be upon us quickly and because our position should be set before next week's annual meeting here of the IMF, as background for the many talks our people will be having with foreign financial officials.

There is also one immediate problem. It was agreed at your June 26 meeting with your top financial and foreign policy advisors that Secretary Kennedy should make an early public call for an intensified official international study of greater exchange rate flexibility.

The Secretary has not implemented this decision, however. And--in response to criticism from some foreign central bankers--he is now wavering over how firmly to do so even at the IMF meeting. (See his memo at Tab E.)/6/ To pass by this obvious opportunity would clearly indicate that the U.S. is not going to take a lead in this area, and Paul McCracken urges at Tab D that the earlier decision be implemented rigorously.

/6/Document 138.


That you sign the memorandum to the Secretary of the Treasury at Tab A, directing him to submit (a) an interagency options paper by September 30 and (b) his proposed IMF speech by noon September 29./7/

 /7/Tab A, a two-paragraph memorandum, is not printed. No options paper was found. The annual meetings of the IMF and IBRD were scheduled to be held in Washington September 29-October 3. A first draft of Secretary Kennedy's speech was circulated to members of the Volcker Group as VG/LIM/69-74 on September 25. (Washington National Records Center, Department of the Treasury, Volcker Group Masters: FRC 56 86 30, VG/LIM/71-VG/LIM/77) In an unsigned September 27 memorandum to Kissinger, Bergsten commented on a revised and expanded "near final draft" that "proceeds very cautiously." He noted that the sense of the June 26 meeting with the President "was for a much clearer and more urgent call to action on this issue and three months have already elapsed." Bergsten regretted rejection of the option for widening margins within which exchange rates could fluctuate but nonetheless recommended that Kissinger sign an attached memorandum to the President requesting authority to approve the proposed speech. No record of the President's action was found. (National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I) Separately, on September 27 the Department of the Treasury forwarded to the White House draft welcoming remarks for Secretary Kennedy to read at the opening of the IMF-IBRD meeting on the President's behalf. In his covering memorandum to Kissinger, Bergsten commented that the President's decision not to address the meeting was "a needless affront to these two valuable organizations." He continued, "No US President in history has heretofore failed to address the meetings personally when they were in Washington." Kissinger approved the text on the President's behalf. (Ibid., Box 306, IBRD/IMF) See Department of State Bulletin, October 27, 1969, pp. 353-358, for text of Secretary Kennedy's September 30 speech.

Approve options paper only
Approve proposed speech only

/8/This option is checked and a note written next to it reads: "done via phone." The memorandum for Secretary Kennedy (Tab A) did not go to the President for his signature.


140. Information Memorandum From the President's Assistant for National Security Affairs (Kissinger) to President Nixon/1/

Washington, October 14, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. Confidential.

International Monetary Developments

Recent Developments

Attached are memoranda from Secretary Kennedy (Tab A) and Paul McCracken (Tab B) on the international monetary developments of the past ten days:/2/

/2/Tabs A and B, both dated October 4, are not printed.

1. Germany's floating of the mark. The mark has now risen in value by about 6%./3/ The first act of the Brandt government is likely to be to fix a new parity 6-1/2-8% above the old rate of four DM equal $1.00. They will almost certainly also remove the 4% border taxes on trade which they adopted in November 1968 as a substitute for revaluation at that time--so the effective revaluation will be 2-1/2-4% on exports and imports and the full 6-1/2-8% on all other international transactions./4/

/3/Following the West German elections on September 28, the Mark had been allowed to float on September 30.

/4/After assembling a Parliamentary majority on October 3, Willy Brandt became Chancellor on October 21. Documentation on the German measures in November 1968 is in Foreign Relations, 1964-1968, vol. VIII, Documents 215, 216, and 219.

2. The formal IMF decision to create $9.5 billion of Special Drawing Rights (SDRs) in 1970-1972./5/

/5/The IMF Board took this decision on October 3.

3. Laying of the groundwork for serious international consideration of greater flexibility of exchange rates.


Two of the three components of the U.S. international monetary policy agreed at your June 26 meeting with your financial and foreign policy advisers are now completed: a large amount of SDRs has been decided and a tenable exchange rate structure has been achieved through the French devaluation, German revaluation, and UK turn-around into sizable surplus.

In addition, the third point--greater exchange rate flexibility--has moved on to the front burner of the international monetary agenda./6/

/6/Secretary Kennedy discussed the question of "limited flexibility" of exchange rates in his September 30 speech at the IMF; see footnote 7, Document 139.

There is thus an excellent chance that the international monetary system will remain calm for at least six months and perhaps much longer. The task now is to use the available time to improve the basic structure of the system so that relative calm can prevail indefinitely. That task is underway with the study of exchange rate flexibility.

Another significant effect of the recent developments is that both France and Germany have now effectively withdrawn from the Common Agricultural Policy by fully offsetting the impact on their agricultural sectors of their exchange rate changes. The CAP--which many regard as the major impetus toward closer European integration now that their customs union is completed--is thus suspended for all practical purposes. It is quite unclear how and when the Europeans can put it back together. This raises important questions (and perhaps opportunities) for British entry to the EC, our own agricultural exports, and numerous other international political and economic questions.

Remaining Problems

A few problems remain, although they are of decidedly lesser magnitude at present:

1. Our own balance of payments deteriorated significantly in the third quarter. It will continue to deteriorate if we are able to ease our domestic monetary policy as inflation is brought under control. The deterioration will be exacerbated as we continue to liberalize our controls over capital exports.

McCracken in fact cites the need to improve our balance of payments as the main reason why we should push hard for greater exchange rate flexibility. Secretary Kennedy reports that he is working on export incentives and possibly other measures to help our payments position.

2. Germany's revaluation may not be enough to hold speculation on the mark at bay for very long. A few other currencies, notably the Dutch guilder but perhaps also the Japanese yen, could come under pressure to revalue too. And the French franc is by no means safe, given widespread skepticism that the measures it has taken so far will bring its balance of payments into equilibrium.

3. We remain at loggerheads with South Africa over how its gold production should be marketed./7/ Secretary Kennedy regards this as merely an "annoyance", however.

/7/See Document 145.


141. Telegram From the Department of State to the Mission to the United Nations/1/

Washington, October 24, 1969, 2330Z.

/1/Source: National Archives, RG 59, Central Files 1967-69, FN 17-1. Limited Official Use. Drafted in Treasury by Willis and cleared by Volcker and Petty; cleared in State by Trezise and Kerrigan (IO/OES) and approved by Assistant Secretary of State for International Organization Affairs Samuel De Palma. Repeated to the Mission in Geneva and the Consulate in Vancouver for the U.S. delegation to the Colombo Plan meeting in Victoria.

181169. Subject: GA Committee 2--Comments Relative to Syrian Statement on International Monetary Reform and Link between Economic Assistance and SDRs. Ref: US/UN 3621./2/ Concerning link of SDRs to assistance, recommend U.S. spokesman avoid volunteering comment on this subject in speeches or addresses. If public statements necessary suggest US Del confine itself to reference to approach taken by Secretary Kennedy in his press conference on the record October 3, 1969 in Washington. This statement follows:

/2/Not printed. (Ibid.) Cables between the Department of State and USUN on the Syrian proposal in Committee 2 are ibid.

"Question: Do you think, sir, that the creation of Special Drawing Rights will enable you to give some additional aid to developing countries, efforts to assist them, inasmuch as the system has become richer?

Secretary Kennedy: Well, I should think that adding to their volume of reserves does have an indirect relationship to what the nations can do in the way of developing. That doesn't mean a linkage, such as they are talking about, of SDRs with the developing process. I think at the present time the effort should be made to get these SDRs activated and handled and managed in such a way that they contribute to international stability, and that those questions can be looked at and deferred until later."

In private conversations with other delegations US Del may draw on following as and when appropriate:

(1) During the negotiation of the Special Drawing Rights Amendment there was very strong sentiment against any direct linkage of an organic character between the Special Drawing Rights and the provision of assistance for development. It was felt that decisions to create Special Drawing Rights should be entirely governed by monetary considerations and should not be subjected to the pressures that arise for a steadily enlarging flow of real resources from industrial countries to developing countries.

(2) It is important that the Special Drawing Rights become well established as an international monetary asset and this should be our primary consideration during the period ahead. It would be most unfortunate if the question of linkage with economic assistance should lead to reluctance on the part of industrial countries to carry on in future the work that has begun of establishing a facility to provide an adequate rate of growth in world reserves. The latter is a key to adequate growth in world trade and investment and a healthy world economy is vitally important to economic growth of developing countries.

(3) The allocation of Special Drawing Rights is made in proportion to quotas in the International Monetary Fund which was generally accepted as an equitable and reasonable method of allocation. This will make available to the developing countries nearly $2.7 billion in additional reserves during the next three years, a very substantial sum. (FYI. This is about 28% of allocations to be made in three tranches of $3.5 billion in Jan. 1970, and $3 billion each in January 1971 and 1972. End FYI)

(4) Special Drawing Rights involve both rights and obligations, and the obligation for surplus countries is twice as large as the drawing right.

(5) Economic assistance is a matter of political decision in donor countries. Most countries have budgetary and parliamentary procedures governing the provision of development assistance. There are major questions whether countries should abandon these regular procedures, and whether Parliaments would be receptive to doing so. Attempts to introduce new procedures related to SDRs would need to be assessed against the complications introduced into considerations governing the provision of international liquidity.



142. Airgram From the Department of State to Treasury Representatives at the Embassies in the United Kingdom, France, Germany, Italy, and Japan/1/


Washington, November 6, 1969, 5:17 p.m.

/1/Source: National Archives, RG 59, Central Files 1967-69, FN 10 IMF. Confidential. Drafted in Treasury by Willis on November 5 and cleared by Volcker; approved in State by Weintraub. Repeated to USOECD and USEC and the Embassies in Brussels, The Hague, Bern, Stockholm, and Ottawa.

Meeting of Deputies of Group of Ten, Paris, Oct. 31, 1969, on Quota Increases in IMF

Chairman Ossola recalled the September agreement of the Deputies for a total increase in IMF quotas of about 30 percent plus or minus 3 percent./2/ It was implicit that new quotas should be the basis for the second annual allocation of Special Drawing Rights. It was also desirable not to modify substantially the relationship between Group of Ten countries and the developing countries in the IMF. In September figures had been mentioned by a number of countries, and a tabulation has been discussed which showed the U.S. at $6300 million. The United States, the Belgians, and some others did not accept the figures given for them in the September IMF table. Revised figures for these countries, plus the earlier objectives of France, Italy, Japan, and Canada would call for a larger global increase than the amount agreed upon in September.

/2/For information on the discussion of IMF quota increases at the G-10 Deputies meeting, see Margaret G. de Vries, The International Monetary Fund 1966-1971: The System Under Stress, Volume I: Narrative (Washington, D.C.: The International Monetary Fund, 1976), pp. 287-305.

Chairman Ossola suggested a possible avenue of agreement involving two principles:

(1) Accepting a two-tier approach that was more favorable to the developing countries than to the industrial countries, even though this discrimination was rejected by some developing countries as a bad precedent, and

(2) enlarging the total increase despite the adamant position of Germany against this, taking into account the political advantage of so doing to avoid resentment in other countries of G-10 dictation on Fund matters.

The Chairman said he had asked the Fund staff to prepare a table which provided:

(a) A general increase of 25 percent (for all countries except China);

(b) Distribution of $5 billion in selective increases proportionate to present shortfalls in quotas relative to BW calculations;

(c) A reduction of 8 percent of sum of (a) and (b) for G-10 countries. With some rounding, this produced figures satisfactory to most G-10 countries, and would result in an overall increase of about 35 percent. A table showing these results was distributed./3/

/3/Not printed.

Inamura (Japan) accepted the proposal. Nield (U.K.) said the U.K. would accept the two-tier principle in the Chairman's ingenious variation. Handfield-Jones (Canada) called attention to the fact that the 8 percent reduction factor had not been applied to the middle group of industrial countries not included in the Group of Ten. If this were done, the total increase might be reduced to about 34 percent. Chairman Ossola favored this suggestion. Larre (Fr) would accept the table if all other members of G-10 accepted it.

Pieske (Ger) said the Group of Ten should abide by the agreement of last July. This agreement was part of an overall understanding on SDR allocations./4/ We should not change this agreement after the SDR part of the understanding has been implemented. There is no need to go beyond 30 percent plus or minus 3 percent. Any G-10 ceiling appears like dictation to other IMF members, regardless of the amount. The Canadian proposal provides no guarantee that intermediate countries would really accept the 8 percent reduction. To the Germans, the proposal put forward some time ago by Mr. Roelandts of Belgium in the Fund calling for a 31 percent overall increase would be acceptable. The Germans would favor adopting a two-tier system openly rather than in the disguised form proposed by the Chairman. Countries which have raised their quota targets since last July bear heavy responsibility for breaking down the agreement of last July.

/4/See Document 135.

Chairman Ossola pointed out that Belgium, the Netherlands, Sweden and the U.S. did not accept the figures put forward last July for their countries. The July proposal was put forward under great pressure and we had not realized all of the implications. If necessary, we could force the non-G-10 members of the Fund to accept a reduction of 8 percent since we have a majority in the Executive Board.

Palumbo (Italy) accepted the Chairman's proposal, noting that it provided for a $1 billion figure for the Italian quota, as requested in July. Joge (Sweden) said he would have preferred to limit selective increases to only a few countries. However, because the great majority want selective increases, he would accept the $325 million figure shown for Sweden. He thought the other Nordic countries would accept a reduction of 8 percent, and would be glad to have the two-tier system concealed as in this proposal.

De Strycker (Belg) continued to object to the two-tier system, but this proposal could be modified to avoid two classes of countries. 35 percent was a very high percentage increase. The world was not in a phase of general deflation. To reconcile differences, he suggested a two-stage quota increase, with a first stage covering only three years and the second stage the following two years. This would mean taking the proposal of the Chairman, but giving each country only 3/5ths of its total now. The Chairman thought the two-tranche idea of Belgium might be attractive.

Kessler (Neth) also was against going beyond the 33 percent limit. In the selective quota calculation, the $5 billion or 23 percent of the quotas was so divided that the developing countries got less than 23 percent and the Group of Ten got far more than 23 percent, amounting to about 30 percent. The scheme has the merit of making it possible for the U.K. to go down to 15 percent overall increase. He had no quarrel with the mechanism of the scheme, but the 8 percent reduction was too little. The Netherlands would go down to $675 million, or about a 30 percent increase. In response, Polak (IMF) argued that the selective calculation is not as arbitrary as Kessler suggested. The 25 percent general increase is important to non-members of the Ten.

Emminger (Ger) urged the necessity of insisting on pursuing the Canadian suggestion and reducing the middle group of industrial countries by 8 percent. However, 8 percent was still too small a reduction, and he suggested a reduction of 10 percent with some rounding up here and there, to be applied also to the middle group of countries. Ossola (Italy) thought that Italy and some others would not be satisfied with a 10 percent reduction, but asked for the table to be prepared and circulated./5/

/5/Not printed.

Volcker (U.S.) reminded the group that the U.S. had been reluctant to agree to the earlier ceiling because of a feeling that more leeway would be needed, but was equally reluctant to abandon the agreement on the 33 percent limit, related to the SDR allocation understanding. The U.S. had never agreed to the figure proposed for it in July. All objective calculations show the United States entitled to a substantial increase. The United States concluded that the earlier figure would erode our relative position in the Fund too much. Any solution along the lines of Roelandts' proposal, mentioned by the Germans, would bring the U.S. down too low and was entirely unacceptable.

Volcker said the U.S. was willing to live within 33 percent, and this could be done by G-10 accepting small adjustments all around. While no one would obtain his target figure, the desired relative position of

G-10 members could be attained. The U.S. might consider a small reduction in the U.S. figure to get within the 33 percent limit. Volcker saw problems with the Canadian suggestion. He thought the middle countries would not accept it without supplementary concessions by the Group of Ten.

Volcker said that we had never liked the two-tier system, but this was not a matter of life and death. We preferred the disguised two-tier system and had no difficulty with the proposed approach to calculating quotas. We would not stand in the way of a solution.

Volcker said the quota increases also raised the matter of gold mitigation./6/ It was of some direct concern to the U.S., and any solution here was dependent on a satisfactory solution of the mitigation problem. He suggested a discussion of mitigation at this point before returning to the quota question.

/6/IMF members were expected to subscribe 25 percent of any quota increase to the Fund in gold, sometimes a problem for members that did not hold significant gold reserves. IMF quota increases sometimes led countries to exchange currency holdings for U.S. monetary gold, creating a drain on the U.S. gold reserves. Mitigation concerned strategies and procedures for dealing with meeting the gold subscription of any quota increase. See de Vries, The International Monetary Fund 1966-1971: The System Under Stress, Volume I: Narrative, pp. 297-298.

Chairman Ossola accepted this suggestion, and said he was greatly encouraged by the first exchange of views. In view of the short time available before lunch, he suggested another meeting of the Deputies in the afternoon.

Emminger (Ger) said he was not sure there was any chance of getting any further this afternoon, but he and Ossola could talk to Schoellhorn, who was arriving about 2:45 p.m. We should not have a meeting unless we could make further progress.

Ossola argued the great importance of reaching agreement today.

Larre (Fr) complained that the G-10 discussion was on the verge of breakdown. This should not be allowed to happen because of the small difference between 33 percent and 34.8 percent under the scheme.

Chairman Ossola then brought up the subject of mitigation. Primary mitigation had been to some extent handled by installment payments and special drawings during the previous quota increase. There should be credit tranche drawings only if justified for other reasons. Installments might be permitted if requested, but he thought most countries would not so request because of their desire to have their quotas adjusted quickly in order to receive their full share of SDRs. Secondary mitigation had cost the reserve centers about $500 million last time, and this had been mitigated by special deposits of gold in the amount of $350 million and by special gold operations under which countries bought gold from a country having a super gold tranche claim on the Fund, and the Fund restored the positions of these countries by selling gold back to them in return for their currencies. The previous deposit scheme was unpalatable to some of the Group of Ten now, but perhaps the triangular arrangement could be agreed upon. The amount of secondary mitigation was somewhere around $600 million.

Polak (IMF) explained that the suggested mitigation gold sale procedure comprised three stages. For example, India might buy gold from Germany with dollars and pay the gold to the Fund. In the second stage the IMF would purchase DMs with gold. The third stage would be stretched out over time and would permit more DMs to be used in drawings than would otherwise be the case so that Germany could restore its IMF position and reduce its dollar holdings. The end result is that the IMF receives payment in usable currency rather than in gold, equivalent to 25 percent of the quota increase.

Volcker (U.S.) said the problem is not primary mitigation though this may arise for some countries. Our concern is to have a permanent form of secondary mitigation. The most natural solution would be to pay out Special Drawing Rights directly to the Fund instead of gold. Minister Colombo had regretted that this was not now possible. It would be feasible, if generally supported, to amend the Fund Articles to make this possible and to obtain legislative sanction simultaneously with legislative approval of quotas. This would tidy up the SDR agreement. He put this idea forward for consideration of the Group.

Volcker also recognized that the recent Fund Staff proposal would be adequate. The drawings in the third step cited by Polak could in fact begin in advance of the gold payments to the Fund. A number of countries could be used as intermediaries. The United States might or might not play such a role dependent upon the wish of others. What we need is agreement in principle that the Executive Board will work out a mitigation plan on this basis.

Emminger (Ger) thought it might be better that the Fund take in SDRs instead of useable currency, but it would be odd to amend the new SDR plan so quickly to permit this. He was not sure this was a practicable procedure. We should, however, explore the method suggested by the IMF Staff. Germany has participated in these mitigation gold transactions before and would have no difficulty in permitting the DM to be used as an intermediary. Volcker (U.S.) intervened briefly to clarify the point that we could obtain much the same result as an amendment by encouraging countries to repay the Fund in SDRs. Then the Fund would end up with SDRs instead of gold, and this provided a certain degree of logic to the whole procedure.

Morse (U.K.) thought it would be logical for the present gold payment to the Fund to be made in SDRs, but this had been specifically eliminated during the negotiations. He would now be content with the procedure outlined by Mr. Polak.

Larre (Fr) saw a contrast between the rigidity of quota positions and the laxity with which people contemplated amendments to the SDR plan. The ink on the SDR amendment was barely dry and we were talking about amending the earlier understanding. Such an amendment is premature. After three years, we can tell whether the SDR has replaced gold in central banks. The only feasible proposal is the Polak procedure which (a) conforms to the IMF rules, (b) has been used in the past, and (c) avoids disruption for gold holders. However, every member of the IMF that holds gold should be eligible as an intermediary.

Chairman Ossola noted that at least two countries have spoken favorably of the amendment to permit payment in SDRs.

Larre (Fr) suggested that countries must give up something of value when they receive a quota increase. Kessler (Neth) suggested that countries be permitted to purchase gold from the intermediary only when they have no gold or have a rather small percentage of gold in their reserves. He added that we might provide for some gold transactions with gold producers in connection with mitigation. In this way, the IMF could recover gold.

De Strycker (Belg) saw prima facie logic to permitting quota payments in SDRs, but there are two major drawbacks. This could mean that $1.7 to $2 billion of SDRs would be paid into the Fund and thus a very large amount of SDRs would move rather quickly from the Fund to be absorbed by surplus countries. Secondly, the IMF would be deprived of gold, which gives a guarantee that the IMF can get the currency it requires.

Joge (Sweden) had no objection to the IMF Staff method. Permission for direct payment in SDRs would be a more direct method. The world's attitude toward SDRs will be largely determined by the attitudes of the Group of Ten authorities. If such payment were permissible, however, he was not sure he would recommend payment in SDRs instead of gold.

Emminger (Ger) strongly supported the Swedish view that the status of SDRs depends on the attitude of the G-10 countries. He was not absolutely certain that Germany would choose SDRs instead of gold if permitted to do so since the SDR is a gold certificate bearing 1-1/2 percent interest. The Fund could procure usable currencies with SDRs just as well as with gold. There is no real danger that SDRs will become illiquid because of reaching the acceptance limits. However, it is not necessary to push the amendment now. It is satisfactory to obtain pragmatic results.

Volcker (U.S.) said the inclination of the U.S. might well be to pay gold rather than Special Drawing Rights even if the latter were permissible. The mitigation problem was not essentially a matter of gold as such but resulted from the circumstance that quota payments to the Fund would produce pressure on U.S. reserves, however composed. Concerning arrangements with gold-producing countries, Volcker referred to having spent some time during the year exploring the problems of the gold producers with them. This had made it plain to him that we cannot link that problem with mitigation at this stage. He saw no practical way to do so at this time.

Chairman Ossola summarized the results of the meeting as follows:

(1) Primary mitigation is not a problem with which the countries around the table are concerned;

(2) There was a rather widespread desire that Special Drawing Rights be usable instead of gold, but a recognition that it is impracticable to insert such an amendment into the ratification of quota increases. It was not clear that countries would in fact use Special Drawing Rights instead of gold if permitted to do so. We should use the IMF Staff technique of mitigation gold transactions without restricting its use to a particular country. The Fund should be left to determine which countries were entitled to use this procedure and which currencies could serve as intermediaries;

(3) There should be no connection between mitigation and arrangements with gold-producing countries, which is a separate problem.

Chairman Ossola then pressed again for an afternoon meeting but Emminger (Ger) again suggested that this matter be left open until it could be ascertained whether it would be useful to have the meeting. The Chairman suggested that the matter might be taken up again at the time of the EPC meeting. Polak (IMF) said this would be very difficult. The IMF could make a proposal along these lines, but it would take a few weeks to clarify the reaction of the other developed countries. There was little time left to reach agreement by December 31. Chairman Ossola was very reluctant to leave the decision to be worked out in other bodies without reaching unanimous agreement in the Deputies. Polak (IMF) said that if the group wanted to agree they should do so today. He did not think the Executive Directors could be asked to delay further consideration of the matter until after the EPC meeting.

Volcker (U.S.) noted that he recognized the procedural and psychological difficulties of presently introducing an SDR amendment. However, he did not want to associate himself at this point with the Chairman's use of the term "impracticable." The Chairman agreed that "difficulty" could be a better description.



143. Information Memorandum From the President's Assistant for National Security Affairs (Kissinger) to President Nixon/1/

Washington, November 17, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 216, Council of Economic Advisers. Confidential. The date is stamped under the handwritten note: "Back from Pres."

International Monetary Situation

At Tab A is Paul McCracken's weekly report on the international financial situation./2/ It repeats the points which I have already made to you about events which followed the German revaluation:/3/

/2/Not printed.

/3/The Deutschmark, which had been allowed to float on September 30, was formally revalued 9.29 percent from $0.25 to $0.273224 on October 24.

1. The Netherlands and Austria decided not to follow the German move with revaluations of their own, and speculative money which had entered those countries in anticipation of revaluation has now flowed back out.

2. $1.25 billion flowed out of Germany as speculators took their profits from the revaluation of the mark.

3. France and the United Kingdom each picked up about $100 million of this outflow.

4. The exchange markets are likely to be relatively quiet for some months as a result of the German action./4/

/4/The President wrote at the end of the memorandum: "This again shows we were right in not following Treasury's recommendation for urgent action." No Treasury recommendation for urgent action has been found. The President may be thinking back to May when Secretary Kennedy wanted to press hard and Kissinger advised going slow. A November 3 memorandum from Director of the Office of Industrial Nations Widman to Assistant Secretary Petty on "Suspension of Gold Convertibility," concluded that a large projected balance-of-payments deficit in 1970 could lead to a crisis of confidence in the dollar by mid-1970 and that suspension of the convertibility of the dollar to gold would be "the least undesirable" action, but there was no call for urgent action. (Washington National Records Center, Department of the Treasury, Deputy to the Assistant Secretary for International Affairs: FRC 56 83 26, Contingency Planning 1969)


144. Memorandum From Secretary of the Treasury Kennedy to President Nixon/1/

Washington, December 29, 1969.

/1/Source: National Archives, Nixon Presidential Materials, NSC Files, Agency Files, Box 289, Treasury, Volume I. Confidential. Attached to internal National Security Council memoranda and a transmittal memorandum to the President indicating that Kissinger approved Secretary Kennedy's recommendation on the President's behalf since the quota increase was consistent with policy decisions already taken.

Quota Increases in the International Monetary Fund

Following considerable informal negotiation, the Executive Directors of the Fund were formally charged at the Annual Governors' Meeting early in October to complete a general review of Fund quotas by the end of December and to make recommendations for appropriate increases. The Directors completed this process on December 24. The Fund will probably announce the results tomorrow, for December 31 newspapers.

The over-all increase in quotas recommended will be approximately $7.6 billion, compared to present quotas of some $21.4 billion. The potential increase will thus be about 35 percent.

This proposed increase is consistent with our broad program for international monetary reform, as outlined to you last Summer./2/ It is a logical (but less important) complement to the activation of Special Drawing Rights. Larger quotas provide greater scope for balance of payments financing for all countries through the IMF more or less in line with the growth in the world economy.

/2/Presumably a reference to the June 26 meeting with the President; see Documents 130, 131, and 140. An IMF quota increase would complement SDR activation in adding to the stock of international liquidity.

The new quota recommended for the United States is $6,700 million, an increase by almost 30 percent from the present quota of $5,160 million. Since the U.S. quota will increase by a smaller than average proportion, the U.S. share of total Fund quotas will be modestly reduced, from the present 24.2 percent to 23.2 percent.

The share of the main industrial countries (the Group of Ten) in total quotas will be approximately the same in the future as now, approximately 61 percent. This reflects an increase in the weight of the Common Market countries. The quota share of the developing countries has been protected against much of a reduction, although the statistical calculations traditionally used by the Fund in determining quotas would have indicated a significant reduction. The share of developing countries will fall from 28.3 percent to about 27.3 percent.

Quota increases must normally be paid for 25 percent in gold and 75 percent in the member's own currency. The U.S. quota increase will require a gold payment of $385 million and a payment in dollar instruments of $1,155 million. Many other countries, especially the larger industrial countries (except perhaps Japan), expect to make the required gold payment from their own holdings. However, a number of smaller countries would have to buy gold to make the payment, presumably from the United States. In order to mitigate the effect of such gold purchases on U.S. reserves, the Fund has worked out rather complex procedures to "steer" the gold back to where it was bought./3/ These arrangements will avoid a fall in U.S. gold holdings of up to an estimated $600-$700 million, which would otherwise have occurred.

/3/See Document 142 and footnote 6 thereto.

The U. S. quota increase in the Fund will require authorizing legislation in 1970. However, these operations are considered as an exchange of monetary assets and have no budgetary impact.

The established practice is that countries, especially the more developed countries, receiving quota increases in the Fund should increase their subscription to the capital of the World Bank by a corresponding amount. We believe this tradition should be maintained, in the light of our desire to strengthen multilateral lending institutions. This will require authorizing legislation and have a budget impact of $24.6 million in Fiscal 1971, corresponding to a 10 percent paid in portion of a $246.1 million capital subscription. Allowance has been made for this in your prospective 1971 budget.

With your approval, I plan to vote the United States in favor of the proposed increase in IMF quotas and to support corresponding selective increases in World Bank capital in forthcoming discussions in the World Bank./4/

/4/The memoranda attached to this memorandum (see footnote 1 above) indicate that Kissinger's approval on the President's behalf was being passed to Treasury by Robert D. Hormats on January 5, 1970, in time for a World Bank meeting on January 6.

David M. Kennedy 

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